I may not have time for a detailed write-up at the end of the year and I have thoughts to share so here are my results and self evaluation thoughts as of the end of November. I have written this up primarily for my own self education and provide them publicly for your open critique and amusement.
Return as of Friday, 24 November
Like Saul, I want to begin with a disclaimer: I feel my results this year have been exceptional way beyond any possible rational expectation. I was hoping to simply have a higher return than my previous style of investing which means I would have been quite satisfied with anything above a mixture of the S&P 500 and CRSPSC1 indexes. I would have been delighted to reach a 20% return for the year. Instead I find:
**My Portfolio**: + 83.19%
**S&P 500** : + 14.42% (Adjusted for withdrawals)
**VSMAX** : + 10.79% (Adjusted for withdrawals)
How I Measure Results
I currently compare my results to these to the S&P 500 index and the VSMAX mutual fund (based on the CRSPSC1 index) because this is what I would be primarily invested in if I were not picking individual stocks. I also adjust the return of these indexes for any deposits and withdrawals I make during the year in the same way as I calculate my own portfolio return using the method Saul describes in his Knowledgebase. This year I am living entirely off of my investments so I have only withdrawals.
Yet in truth, this is just a number to figure out if I am wasting my time researching individual stocks. My only definition of success in investing (or anything else) is this:
Am I living a better life with less effort?
As it applies to investing: As time goes on, do I feel I am earning higher returns with less time spent on research and less emotional turmoil distracting me from the rest of my life? Can I live off my investments more easily over time? No matter what the actual numeric return, I feel I have succeeded in my investing goals if I can meet this concept of my own success.
Current Positions
LGIH 23.2%
SHOP 13.6%
ANET 11.8%
SQ 9.0%
UBNT 7.1%
TLND 6.7%
HUBS 5.6%
NTNX 5.3%
NVDA 5.1%
SWKS 4.3%
MULE 4.2%
AMZN 3.4%
BRK.B 2.6%
PAYC 1.1%
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**TOTAL 103.4%**
Note: The total of 103.4% indicates the use of 3.4% margin. In general I do not recommend margin trading even though I have mostly profited from its use.
General Thoughts and Self Review
Below follows a combination of my own critical self review, thoughts on what went into my successes and failures, and some observations of larger macroeconomic trends that are important considerations. I always look at both the big picture and the small details which is reflected in this style of commentary on my own performance this year.
I will put in a lot of musing on possibilities here. I do not take any of this particularly seriously, I simply like to look at possibilities and see what seems to be linked together. This is more in the nature of creative brainstorming. I find that if I examine these types of possibilities now I am more likely to see future events more clearly even if my evaluation today turns out to be completely wrong. As such, you may also note that from time to time I seem to contradict myself. This is again simply my examination of the many possibilities of a highly complex system.
Risk Management
A primary concern of mine is risk management, a trait which comes from my previous career as a software engineer in the aerospace industry working with satellites. While I focused on this deliberately in 2016, now in 2017 it has become more of a background consideration as I focus on learning other concepts. As such, I am not going to talk about this much directly except for one new consideration I now always keep in mind:
How likely is the stock price to go down?
I have decided that a stock which is very unlikely to go down yet still is likely to provide a return above the market average is worth far more than a stock which has a higher rate of return. This is part of the reason why LGIH has a higher percentage of my portfolio than SHOP, ANET or SQ which all have higher returns this year and likely higher potential returns in the future.
SWKS is in a similar category, though performance is far below LGIH at a “mere” +41.71% YTD.
I am happy to make money through investing. I am even happier if I can hold on to that money!
The Saul Mastermind Effect
I have often thought that this discussion board, “Saul’s Investing Discussions”, represents an informal mastermind group. A mastermind group is in essence a peer-to-peer mentoring concept which is an extremely powerful way to help each other learn and solve problems. Normally a mastermind group would be more formalized and have a closed membership. I have never before encountered a public forum such as this which functions as a public mastermind group. While this was clearly initiated by Saul’s desire to openly share his own knowledge, I see that it is the community as a whole sharing and discussing which has created the mastermind effect.
I find this a spectacular group achievement which shows the generally high quality of the membership of this board. Thank you everyone for making this group possible!
If there is any rational explanation for my irrationally high return this year, it is likely the mastermind group effect.
Rebound from 2016
I have noted often that The Market (almost as an entity of its own) seems to dislike uncertainty more than anything else. Even a bad earnings result is often not as disastrous as simple uncertainty. This was particularly apparent in 2016 though it took me a year to fully connect the dots on what had happened. 2016 was filled with significant political and economic uncertainty. Of most significant note, the presidential election had the potential to send the country off in to radically different directions with unknown consequences. A number of smaller (or at least shorter) events contributed, including the Chinese market crash in January, Brexit and low oil prices followed by the OPEC production cut.
Amid all of this uncertainty, I watched many companies report good results for a quarter only to watch the stock price stay stagnant or even fall. As I look back now, it seems likely to me the general uncertainty and the punishment of good results were linked.
As I look back at 2017, this seems to have possibly played in the abnormally high returns of high quality companies. In 2016 I watched multiple times as good companies reported good quarters only to have the stock price remain unmoved. Or I watched The Market loose faith in great companies simply because they were an inevitably casualty of the wider economic and political uncertainties (LGIH in particular). This seems to me to represent a pent up pressure on these companies which would then be released in a time of less uncertainty. Thus, a rebound in 2017.
If any of this is accurate, perhaps 2016 and 2017 would best be looked at together instead of as separate years. Yet … the boundary must be drawn somewhere. As Saul has noted, it is all too easily to cherry pick time periods to make results look good or bad.
The AI Trend
One of the biggest exciting stories this year in technology has been Artificial Intelligence (AI) and how Big Data has permitted new breakthroughs. I can see this in my own life primarily in the form of improved voice recognition, other uses being more second hand (new stories) or less obvious. AI has been one of the holy grail technologies of software engineers for decades and also a concept easily understood by the average person. This means that any breakthrough in AI leads to widespread excitement. The problem historically is that the excitement has never lived up to the hype. Will this time be different? I don’t know.
Personally, I am dubious. I have no doubt some amazing new technologies will come out of this latest breakthrough and advances which are following quickly on its heels. Yet at the same time, the hype has surpassed the current reality. Far too many maybes. All we know for certain right now is that the combination of Big Data and specialized machine learning hardware are providing new results. Far too early to know for certain what that will mean for our future.
I have my own hopes of course yet as an investor I am more interested in what is happening today. I primarily invest in what is happening today, not in hopes, dreams and maybes.
The Big Data Trend
Recent advances in technology and internet infrastructure have enabled the era of Big Data. Data is being collected, stored and analyzed at a scale never before achieved in human history. This is a large part of the basis for the recent AI breakthroughs though the implications of Big Data go far beyond AI. The implications and opportunities of Big Data are still being discovered. Less exciting than AI yet more immediately important in our lives. In my own portfolio I have been invested in several companies directly involved in Big Data though at this time only TLND still has my full support as an investment. While I remain invested in MULE, I have severe reservations I will discuss below. HUBS is on the periphery of Big Data yet it does not exist purely because of Big Data in the way that MULE and TLND do.
Diversification and Technology
An argument can be made that my portfolio is not very diverse. To some extent I agree as I am currently invested primarily in tech stocks and one homebuilder. Scary! Yet I have come to believe we can no longer group together all tech companies. Too much of our world relies on high technology and the differences between them are becoming drastic. SWKS sells chips for mobile phones while SHOP creates a platform for online sales and SQ enables small businesses in the brick and mortar world to more easily accept payments. Not much in common here yet they are all grouped together in the tech sector. It is also hard to find companies which are not related to technology. SBNY is an online bank yet not officially a tech sector company. CASY runs gas stations with stores & restaurants in small towns yet they added an online pizza ordering capacity with their own app. Where is the boundary? So I am throwing out conventional definitions of diversification as it applies to sectors of the market.
I am not against looking at other traditional sectors yet I also consider opportunity cost, my own knowledge of what the company does, and my own comfort with that type of investment. I generally avoid banks because I distrust the whole concept of living in debt yet I was invested in Signature Bank (SBNY) for several months for a decent profit until it looked like it was no longer a good investment. I know nothing of how biotech stocks and drug companies make money and how the FDA process effects that so I have largely ignored this sector as I have difficulty evaluating the prospects of such companies. Yet I was invested in KITE earlier this year and was quite happy with it at the time.
Yet technology … I know technology and can evaluate it easily. I invest in tech companies for the same reason Warren Buffett does not: I know how to evaluate them and their prospects. I cannot so easily look at a company such as Coca-Cola and evaluate its prospects. Simply not my area of expertise.
LGIH: My Portfolio Monster
LGIH has grown to an absurd portion of my portfolio for a few simple reasons:
- The price went up.
- I see minimal chance of loosing money.
- I see a high chance of above average returns.
I periodically trim a bit off of LGIH to keep its size under control yet I am generally content to let this money sit where it is. The time to really begin watching close will be beginning in March 2018 when year-to-year closings become more difficult to match.
My only concern is that The Market seems to be getting more optimistic about LGIH. This increases downside risk and decreases upside potential by including hopes of future growth into today’s price.
I note that the P/E of LGIH is currently at 15.66. At times I have wanted to call this a low P/E as so many of my growth stocks have been valued higher by The Market. However, this seems to me another form of price fixing. The current P/E ratio represents more hope for the future of the company than I have seen since I first began following this stock in early 2016.
I still believe the likely downside for LGIH is minimal at the moment, yet I am beginning to consider if I might find higher returns elsewhere.
INFN: A Painful Lesson
One of my most painful lessons has been Infinera (INFN). I doggedly held on through March when I should have exited last year at multiple different occasions. As this was at one time my largest position, this represents a large loss not only in actual price drop in 2016, but also in lost opportunities continuing through my eventual sale in 2017. Lesson learned: Don’t get attached!
SWKS: A reminder that expertise is not necessarily linked to high returns
As a very talented engineer myself I always want to believe that high expertise will be rewarded. Unfortunately, the world simple does not work this way. At an individual level expertise can help yet people skills are what earn more money. SWKS is a reminder that corporations work the same way. I still believe in the quality of Skyworks’ products and their good business model. I am even satisfied with my return in this stock. Yet compared to some other companies I could be invested in I am disappointed. Their technical expertise simple is not rewarded and this expertise is the primary reason I see for being invested in SWKS.
I am not in a rush to sell as I see minimal downside SWKS at the moment and the return is still satisfactory. At the same time, SWKS has become a primary source for funds when I see a new opportunity.
It is also very important to keep perspective with SWKS. This stock is up 41.71% this year. That is amazing! It is unfair to compare this company to almost anything else in my portfolio yet nonetheless that is what I compare it to. I am likely to keep SWKS at its current position size.
SNCR, SKX, BLL, MIDD: A loss in faith in management
These four companies I sold out of because I lost faith that management was running the companies in a way that would benefit my portfolio. BLL was a particularly hard choice as it has been a great company and part of my portfolio for many years yet management is attempting to take the company in a direction that does not align with the entire reason the company has been successful in the past. SKX I never did fully buy into the hype yet what convinced me was a very strong focus on brick and mortar stores at a time when many brick and mortar stores are closing down in favor of internet companies.
PAYC is in a similar situation. PAYC continues to rise in price yet I am very concerned at the high levels of stock based compensation. I sold the majority of my position in August and may sell the remainder soon. This goes back to risk management. The high level of dilution is too big a red flag for me to ignore. Maybe everything will be fine and the price will only rise from here yet I have too much concern that something is wrong behind the scenes and I have other better places for this money.
MULE: Is this a unicorn?
I have been in and out of MULE a couple of times this year. Sounds like a great idea, management talks great, and finances look like they could be on the cusp of rapid growth. Yet the story sounds too good to be true. Just yesterday I went over the discussion from July where I wrote up my concerns and decided to sell my position in MULE as nothing about my concerns have been addressed in the past four months. I have better places for this money. For reference:
http://discussion.fool.com/saulr80683-othalan-your-instincts-are…
AMZN, BRK.B: Just In Case …
These are two stocks I originally bought because I considered the likely to fall in price only slowly on market-wide panics, at least in comparison to my other stocks. This gives me a source of funds to use opportunistically when the whole market is down. Nothing has changed, I am happy to let this portion of my portfolio sit and wait for opportunity. This is as close as I am likely to come to having money in cash.
VFIAX, VSMAX: No more index funds!
A year ago I had a large percentage of my portfolio in index funds as a hedge against the risks of my own ignorance and because I simply didn’t know where to put that much money so quickly. As I have learned and become more comfortable in my own skill, it naturally made less and less sense to maintain those index funds so they were traded in for stocks with more opportunity. For the moment I feel no need to be index funds though if I ever tire of the work involved in tracking individual stocks I would likely return to these same two funds.
NVDA: A Populist Investment
As I discussed above, I have reservations about the AI. Yet NVDA is at the heart of the popular obsession with the latest breakthroughs in AI. While they are helping push the boundaries of a breakthrough technology (which I don’t necessarily like), they seem a solid enough company to be earning a profit. I am invested for the moment with reservations which is shown by the relatively small position size NVDA hols in my portfolio.
I am Only Human
Finally, I find I am only human. I see Saul at 97% return for the year and I wondered for a moment: “What did I miss that I am behind him?” Hah! What absurdity! In truth I don’t care about anyone else’s performance as I only compare my performance to myself. Yet still … I am only human. The thought did occur to me.
Comments are Welcome!
Comments are always welcome.
Thank you Saul and everyone here who has made this group possible!